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Why consider ETFs?
An exchange-traded fund (ETF) is a portfolio of securities that is listed on an exchange and can be bought and sold throughout the trading day at prices determined by market supply and demand, similar to how shares of publicly traded securities trade on major stock exchanges. Most ETFs are structured as open-end investment companies, similar to the way mutual funds are structured, and invest in an array of asset classes including stocks, bonds and other types of securities. The primary benefits of ETFs include:
- Low cost: ETFs typically have lower management expenses than other pooled investments, and the minimum initial investment required is just one share.
- Tax efficiency: ETFs generally have lower turnover and don’t need to sell securities to meet redemptions, potentially reducing capital gains.1
- Liquidity: In addition to the liquidity afforded by exchange trading, the fact that the number of shares of an ETF can expand or contract based on demand also enhances its liquidity.2
- Diversification: Most ETFs invest in a large number of securities, either across multiple asset classes or within a particular asset class, sector, industry or investment "theme," providing access to a diversified basket of securities in a single transaction.
- Transparency: An ETF’s holdings are fully disclosed each day. With real-time pricing, the current trading price can be viewed at any time throughout the trading day.
What is strategic beta?
Strategic beta3 (or smart beta) ETFs are a rapidly growing segment of the market. Unlike traditional ETFs that track market capitalization-weighted indexes, strategic beta ETFs track indexes with underlying holdings weighted according to a single factor or combination of factors other than market capitalization such as valuation, price momentum, dividends, volatility, yield, or socially responsible investing.
The primary objective of strategic beta ETFs is to provide better risk-adjusted returns than market cap weighted benchmarks.
Although smart beta funds track alternative-weighted indexes, they are still primarily passively managed funds because the funds track an index that uses a predetermined and disciplined rules-based methodology to determine how index components are selected and weighted. The fund’s manager is not able to deviate from this methodology.
How ETFs compare to other investments
ETFs combine some of the features of open-end mutual funds and individual stocks, but also have distinct characteristics that set them apart from these and other investment vehicles.
|CHARACTERISTIC||ETFs||Mutual Funds||Individual Stocks|
|PORTFOLIO OF SECURITIES||•||•|
|PUBLICLY LISTED, INTRADAY TRADING||•||•|
|HAVE A MARKET PRICE AND NAV||•|
|DAILY TRANSPARENCY OF HOLDINGS||•|
|MAY TRADE AT A MATERIAL PREMIUM OR DISCOUNT TO NAV||seldom|
|ISSUES FIXED NUMBER OF SHARES||•|
|NUMBER OF SHARES OUTSTANDING CAN CHANGE DAILY||•||•|
|ALLOWS INVESTORS TO BUY OR REDEEM DIRECTLY FROM THE ISSUER5||•|
|SHARES REDEEMED BY ISSUER AT NAV LESS SALES CHARGE6||•|
|MAY BE LEVERAGED||•||some|
The characteristics shown are not all inclusive and represent general attributes of typical investments of the types indicated. ETFs, mutual funds and individual securities are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements. Please refer to the prospectus for more information.
Shares of ETFs are bought and sold at market price (not nav) and brokerage commissions will reduce returns. As a result, an investor may pay more than net asset value when buying and receive less than net asset value when selling. Fund shares aren't redeemable directly with the Fund except when aggregated in creation units, which are very large aggregations available to certain institutional investors.
2 The liquidity of an ETF is a reflection of the liquidity of the underlying securities in which it invests as well as the ETF’s trading volume on the exchange. A fund may be exposed to less liquid securities which can subject the fund and shareholders to liquidity risk. While rare, trading in ETF shares may be halted on an exchange due to market and other conditions.
3 Beta: A measure of the variability of the change in the share price for a fund in relation to a change in the value of the fund's market benchmark. Securities with betas higher than 1.0 have been, and are expected to be, more volatile than the benchmark; securities with betas lower than 1.0 have been, and are expected to be, less volatile than the benchmark.
4 Diversification does not assure a profit or protect against loss.
5 Only Authorized Participants (APs) can redeem ETF shares.
6 Investment return and principal value will fluctuate and shares, when redeemed/sold, may be worth more or less than the original purchase price.